Why It's Better To Sell A Startup For $20 Million Instead Of $200 Million

Michael Arrington (left) actually made
more money on his $30 million exit than Arianna Huffington
(center) did on her $315 million exit.

It sounds impressive when a founder sells a startup for tens of
millions of dollars.

But it sounds really impressive when a company sells it
for hundreds of millions of dollars.

As a founder,
which option is better? For many, a smaller exit should be the
desired outcome.

The short reason: lower-valued startups take less time to scale
and less venture capital to fuel which means founders will likely
own higher percentages of their companies when they sell.

There are also fewer acquirers as the price of your company
increases. And when an acquirer does come along, there's more due
diligence which means sealing the deal can take much more time.

Unless you have a hot company like Instagram. Then you can forget
all of that and close a billion-dollar acquisition in 48
hours.

Let's look at some examples.

Bleacher Report sold to Turner for
a little more than $200 million five years after it was
founded. But between four founders and more than $40
million raised, each was diluted to 5-10% stakes. That means
each founder walked away with about $10 million after the
sale.

Arianna Huffington, Ken Lerer and Jonah Peretti also
sold their startup, The Huffington Post, to AOL six years after
it was founded. Their price was a lofty $315 million.
Each owned different percentages, with Ken Lerer earning
significantly more than Huffington. Huffington reportedly owned
less than 14% of the company and took home an estimated $18
million.

But look!
Michael Arrington sold TechCrunch to AOL for about $30
million five years after he founded it. He reportedly
owned 80% of the company when he sold it because he never
raised any venture capital. That means he took home about $24
million before taxes – more than Arianna Huffington.

For a non-media example, there's ThinkNear, a TechStars
company founded by Eli Portnoy. It
sold to Scout Advertising for $22.5 million 18 months after
its launch. It had raised $1.63 million. At the time
of its acquisition, it had a Series A term sheet for $4
million. If ThinkNear had turned down the acquisition and taken
the Series A investment, Portnoy says his share of the company
would have been diluted an additional 25-30%.

Jeff Richards, who is now an investor at GGV Capital,
tried both kinds of companies. Early in his
entrepreneurial career, he founded a company that was valued at
$250 million but Richards says he walked away with nothing. In
2003 he started another company, R4. Two years later he sold it
to VeriSign for less than $20 million. That time, Richards says
both the founders and investors were "thrilled" with the
outcome.

So who would you rather be, a Portnoy and an Arrington? Or a
Huffington? All made roughly the same amount of cash but for
Portnoy and Richards, the smaller exits took significantly less
time.

The decision to go big or stay small is one entrepreneurs
shouldn't take lightly.

Arrington says he nearly accepted VC money for TechCrunch four
times. He initially didn't raise money because it wasn't an
option. In 2005 investors were less willing to write
checks.

"When I started my first company, Achex, we raised $18 million in
venture capital in 2000 from DFJ," Arrington wrote to Business
Insider in an email. "The company later sold for $32
million, but due to a 2x liquidity preference (common in those
days), the founders essentially got nothing, just a few hundred
thousand dollars to not block the deal."

Arrington says he raised so much then because it was nearly
impossible to build that kind of business without a lot of
capital. "These were the days when you had to buy Oracle
database stuff, and there were no easy hosting options like
Amazon and Google offer...Today, most startups don't have
multi-million dollar infrastructure costs just to get the service
launched. So there is less need for capital to get to market."

Raising a lot of money at a high valuation has its benefits.
It can mean overtaking
competitors, which are prevalent in early stages (GroupMe had to
battle Fast Society before selling to Skype, Foursquare had to
beat Gowalla, etc). It can also make a difference in
hiring.

It's easier to
attract engineers and other talent when you have brand-name
investors tied to your business and you can offer attractive
salaries. Arrington recalls his difficulty luring his business
partner, Heather Harde, away from News Corp where he says she was
making $1 million. All he could offer was a $150,000 base and
stock options.

Arrington
sometimes wonders how much further he could have taken TechCrunch
had he taken funding. "I often wonder if we
could have grown faster, expanded in other ways, if we had raised
money and were less frugal," he wrote.

For Portnoy, the pros of staying small and selling early
outweighed the risk of raising a lot.

Portnoy had a family to support and no nest of cash to fall back
on. An acquisition would make his financial situation much more
comfortable. In addition, one of his board members had run a
company that took a lot of funding and eventually went public.
Even though that board member's company had an exit 30 times
larger than Portnoy's, he ended up with about the same amount of
cash.

Lastly, Portnoy knew most entrepreneurs only get one shot at a
startup. If they fail, it's the end of the road. But if they're
able to get an exit under their belts quickly, more opportunities
present themselves later. Investors are eager to back founders
who have successful track records. And obtaining personal wealth
means a different, sometimes bigger mindset the next time around.

It's important to note that while smaller exits may benefit
entrepreneurs, it doesn't always benefit investors.

"As a VC, I am now investing in companies
shooting for outcomes >$200M, but it’s not the right model for
every entrepreneur or every company," Richards says.

Arrington, another entrepreneur turned investor, referred to a
startup his firm CrunchFund backed that sold early against
investors' wishes.

(Side note: When an investor's and entrepreneur's exit plans
don't align, investors occasionally offer to let founders take
money off the table. Then, even if they go for a big exit and the
company fails, the founders have a financial cushion. Snapchat's
founders just did that;
each was given $10 million in addition to the $60 million
their startup raised.)

Although Arrington doesn't see himself founding another company,
he says he'd always opt to raise as little money as possible. "In
general I'd only raise venture capital if I absolutely had to.
I'd raise it opportunistically based on market conditions to take
as little dilution as possible. And I'd spend that VC money the
same way I spend my own money in business - extremely frugally,"
he said.

Jonah Peretti, who co-founded The Huffington Post and now runs
another high-valued company BuzzFeed, offers different advice.

"My advice is you shouldn't do a startup for financial reasons,"
he wrote via email. "Most startups fail and there are easier
ways to make money with less risk...And if a company is
successful, which is very hard to achieve, the money comes
whether you build a fat company or a lean one. Mike
[Arrington] and Arianna [Huffington] both did great
financially. So did Mark Zuckerberg and Kevin Systrom.
How many yachts can you water ski behind?"